Circle: Dismal Market? The First Stablecoin Stock Continues to Expand

Core Viewpoint

1. Ecosystem Layout: Still the old script, crypto investment under pressure, new scenarios continue to be explored

(1) The average USDC circulation value in the first quarter was 75.2 billion. After hitting a low in February, it slowly climbed to nearly 77 billion by the end of the quarter under adverse geopolitical conditions, reflecting a 2% quarter-on-quarter growth, similar to the previous quarter. The newly minted coins amounted to 73 billion, a quarter-on-quarter decline, affected by the dismal performance of cryptocurrency assets in Q1. However, excluding this impact, the minting scale remains high, reflecting the expansion of demand scenarios beyond cryptocurrency asset investment.

At the same time, the redemption volume reached 72 billion, with a faster year-on-year growth rate, indicating that under pressure in the cryptocurrency market, some users are cashing out profits or turning to other interest-bearing products.

The ratio of USDT's scale compared to USDC decreased in January, but quickly recovered in the following two months. Therefore, from a competitive perspective, USDT still poses a significant competitive threat. After the Drift hacking incident in April, Circle faced negative public opinion, while Tether actively provided financial assistance to Drift, causing Circle to lose customers.

Currently, we are still in the early stages of expanding the overall stablecoin market, so competition will not temporarily become a major factor affecting USDC's growth.

(2) Distribution within the USDC ecosystem: Circle's internal share further increased to 18%, with an average retention rate of 17.2% during the day, rising from 6% over the past year. Meanwhile, the external sharing ratio of reserve interest income slightly decreased by 1 percentage point, and there is hope for further optimization in the future to enhance profitability. Coinbase accounted for nearly 25%, showing a trend of active retention compared to the previous quarter.

(3) By the end of the first quarter, the number of digital wallets (MeWs) holding more than $10 in cryptocurrency reached 7.2 million, with a net increase of 400,000 compared to the previous quarter, exceeding market expectations and reflecting the growth of the platform's direct user base.

(4) In terms of ecosystem expansion news, the first quarter mainly involved collaborations with Cash App, Polymarket, and Kyriba (platforms supporting native USDC transactions), while also promoting the scale of the Arc public chain and CPN transactions.

Overall, USDC's on-chain transactions in the first quarter reached $21.5 trillion, a year-on-year increase of 263%. The annualized transaction scale of CPN calculated in March was $8.3 billion, and in April, a new product, Managed Payments, was launched, allowing financial institutions to enable stablecoin payments without managing digital assets.

2. Revenue has highlights but is not as stunning as last quarter: Non-interest income performed better than expected but slowed quarter-on-quarter.

The aforementioned ecosystem expansion aimed at B-end customers will also bring Circle income beyond reserve interest—accounted for in the "other income" category. Therefore, in addition to helping expand the USDC market, it also serves as a second curve for Circle to combat the pressure of growing reserve interest during the interest rate cut cycle.

In the first quarter, other income reached $42 million, although it still accounted for a small proportion (6%), it maintained a doubling growth under a rising base. However, from a trend perspective, the quarter-on-quarter growth rate of 13% slowed compared to the previous quarter's 29%, not as impressive as last quarter.

3. Gross Margin: Increased retention share, buffering sharing pressure

The market previously worried that while Circle expanded its ecosystem, it would also need to share reserve interest income with partners, and that Coinbase's financial report revealed an increase in its USDC share, thereby raising Circle's channel distribution costs and putting pressure on gross margins.

The actual situation is that Circle continues to alleviate cost growth pressure by increasing its self-held USDC share. The cost paid to Coinbase as a proportion of overall sharing costs has decreased (from 97% to 75%). It is important to note that Coinbase has the greatest bargaining power in its cooperation with Circle, thus the sharing ratio of 50% is also the highest.

Additionally, most of the income from software, payments, and other infrastructure services in other income categories belong to high-margin businesses. This quarter, the growth rate of other businesses was faster, and the contribution ratio of income also increased. Ultimately, the gross margin was 41.4%, continuing to improve by 130 basis points quarter-on-quarter.

4. Under the rigid investment cycle, profits are under pressure: Operating profit declined significantly year-on-year, also due to the rigid investment cycle, where a large proportion of interest income is very sensitive to changes in profits once affected.

However, in the Q1 financial report, management maintained the guidance for FY 2026, keeping the adjusted operating expense range (570-585 million) unchanged, which is better than the market's higher investment expectations (725 million).

5. Future Growth: Guidance unchanged, short-term fluctuations still warrant caution

(1) Regarding the outlook for USDC's multi-year scale growth, management in Q1 still maintains a multi-year CAGR growth expectation of 40%. However, like the previous quarter, Dolphin believes it is still necessary to remain cautious and not to price immediately: due to significant market changes, this can be temporarily ignored. Based on last year's situation, this medium- to long-term qualitative guidance does not necessarily represent that short-term targets will be met.

(2) Other income also maintains a revenue target of $150-170 million, with a year-on-year growth rate of 46%. If annualized directly based on Q1, it would be $167 million, just within the target range. However, Dolphin believes that with the effective advancement of the CLARITY Act, there is a good chance this guidance will beat expectations.

6. Overview of Important Financial Indicators

Dolphin's Viewpoint

The performance in Q1 is similar to a "strengthened" version of last year's Q4—cryptocurrency trading sentiment has further cooled, but Circle has not stopped expanding into other scenarios, resulting in even greater short-term profit pressure.

Although Coinbase and Circle belong to different segments of the industry chain, the impact on both parties is different when the cryptocurrency market is poor (Circle's impact is smaller), and there is also the issue of profit sharing between them. However, in the short term, both are moving in the same direction in terms of trading rhythm.

Therefore, last quarter, under the pressure of cryptocurrency assets and unclear policy timelines, we focused on a safety baseline price. This quarter, we are more inclined to pay attention to how much upward recovery space remains. Currently, with a valuation of 28 billion, it corresponds to Dolphin's neutral expectation when it first covered last year (can refer back to "Coinbase vs Circle: The Symbiotic Strangulation in the Stablecoin Circle, Who Dominates?").

However, given the significant short-term fluctuations, we will estimate based on this year's performance outlook:

Assuming that in the remaining three quarters of this year, the cryptocurrency market stabilizes but may be difficult to replicate last year's performance due to inflation and interest rate expectations, we estimate that the stablecoin scale will grow by 5% quarter-on-quarter (last year's QoQ growth in Q2 to Q3 was 12%), reaching $87 billion by year-end. Based on a constant federal interest rate of 3.5%, total annual interest income would be $2.8 billion, and other income is expected to exceed the upper limit of the guidance of $170 million, totaling $3 billion in revenue, with a year-on-year growth rate of 9%.

With a gross margin of 42% and an adjusted operating expense midpoint of $580 million, the adjusted operating profit would be $680 million. Yesterday's closing price * ( locked content and detailed value analysis have been published in the Long Bridge App "Dynamic - Depth" column of the same name).

In summary, the current reasonable recovery process of Circle has largely been completed. The opening of future space will depend on the expansion progress of stablecoins and USDC. In the short term, due to the effective advancement of the CLARITY Act, under the absence of more systemic risks macro-wise, it is expected to bring some positive sentiment, thereby supporting the current valuation.

The following is a detailed analysis

I. Basic Business Framework of Circle

Circle is the issuer of the stablecoin USDC, with main revenues coming from: (1) Interest on reserve assets, which is linked to the market circulation of USDC and treasury bond rates. (2) Other income, including providing Web3 software (SaaS subscriptions), CPN payments (charged based on payment amount/number of transactions), and service fees or gas fees charged by the Arc public chain (charged per transaction).

To mitigate the impact of interest rate cuts, Circle is actively exploring other income items, with a major push in 2025 for CPN payments and Arc public chain business. Currently, other income accounts for nearly 5%, and it is expected to accelerate growth and expand scale in the future.

In terms of expenditures, Circle's internal operating costs mainly consist of employee salaries, while external costs mainly include channel sharing and transaction costs, which account for 60% of revenue (most of which goes to Coinbase). After adding back depreciation and stock-based compensation, the EBITDA profit margin is around 20%, which is lower than most fintech platforms. Therefore, while expanding the ecosystem, the expected increase in sharing costs has also raised concerns about Circle's short-term profitability.

From a medium- to long-term perspective, the importance of ecosystem expansion is higher. Currently, USDC ranks second in the entire stablecoin market, with its advantage over the leader USDT being compliance. Once the CLARITY Act is implemented, USDC is expected to continue to demonstrate its "relative" advantage, attracting more institutional capital.

II. USDC Ecosystem: Accelerating New Coin Issuance, Short-term Impact from Cryptocurrency Market Pressure

In the first quarter, the average circulation scale of USDC was 75.2 billion, a quarter-on-quarter decline, but climbed to 77 billion by the end of the quarter, reflecting a 2% quarter-on-quarter growth. The minting during this period was 73 billion, and redemptions were 72 billion, with a noticeable slowdown in net issuance compared to the third quarter. According to Coinmarketcap, USDC's circulation balance rapidly dropped under panic selling in the cryptocurrency market in January, rebounding only in early February.

1. USDC External Market Share

In the overall stablecoin market, USDC's share remained stable at 28%. Compared to its most direct competitor USDT, USDC did not show a sustained competitive advantage.

2. USDC Internal Channel Competition

In terms of distribution across different channels, Circle's internal holding ratio continues to increase, reaching 18%.

Based on the Q1 financial report disclosed by Coinbase, its share of USDC circulation increased to 25%, showing a trend of active retention compared to the previous quarter.

Another core indicator reflecting ecosystem development—the number of effective digital wallets—by the end of the first quarter, the number of digital wallets (MeWs) holding more than $10 in cryptocurrency reached 7.2 million, with a net increase of 400,000 quarter-on-quarter, speculated to be mainly due to continued slowdown under pressure in the cryptocurrency market.

III. Other Income Continues to Exceed Expectations, but the Trend is Not Very Positive

Since 95% of Circle's income comes from reserve asset interest income, which can be considered public data, the main source of expected discrepancies is other income, which continued to exceed expectations in the first quarter.

Specifically, other income mainly includes minting income, trading, custody, Web3 API suite, tokenized fund USYC, and CPN fees (fixed access fees + settlement/audit fees charged per transaction, Arc chain gas fees, etc.) that were launched in April last year.

In the first quarter, other income reached $42 million, with a quarter-on-quarter growth of 13%, which has slowed down and is not as impressive as last quarter. Meanwhile, the company maintains its guidance for this year's other income at $150-170 million, which does not appear very positive from the quarter-on-quarter growth trend. Dolphin believes that if USDC expands normally, there should be a possibility of continuing to beat expectations.

The major income, which accounts for a large portion, is affected by the pace of USDC expansion and the current treasury bond rate environment. In the first quarter, USDC's average scale grew by 70% year-on-year, with the interest rate dropping to 3.5%, a year-on-year decrease of 64 basis points, resulting in a reserve interest income growth rate of 17%, which has rapidly slowed.

However, the subsequent expectations for interest rate cuts have basically dropped to zero. Therefore, if the scale continues to expand normally in the next three quarters (QoQ growth of over 5%), there is still hope for maintaining a 5-10% growth for the year under pressure from year-on-year interest rates.

IV. Under Rigid Investments, Profitability is Under Pressure

In the first quarter, the gross margin increased by 130 basis points quarter-on-quarter, reaching 41.4%. Circle continues to alleviate channel sharing growth pressure by increasing its self-held USDC share. Additionally, most of the income from software, payments, and other infrastructure services in other income categories belong to high-margin businesses. This quarter, the growth rate of other businesses was faster, and the contribution ratio of income also increased.

Despite the pressure on revenue growth slowing down in the first quarter, all expense revenues still maintained high growth, resulting in an adjusted EBITDA of $133 million, with a profit margin of 19.2%, a quarter-on-quarter increase of 50 basis points.

The company maintains its guidance for 2026's total costs and operating expenses (excluding SBC and depreciation) unchanged, still at 570-585 million, a year-on-year increase of 10%, which is lower than market expectations.